Tag: FDI

In a Forbes magazine article that caused a happy stir in right-wing social media, Harry G. Broadman argued that Prime Minister Narendra Modi’s “governing prowess” had “boosted India’s GDP growth” and “produced sizeable increases of inflows of foreign direct investment (FDI)”. He stated that the reforms implemented by Modi in his first three years were “sizeable, though not huge”, but still impressive in the context of a “messy” system of democracy, and “against the backdrop of decades of reform inertia and inaction by successive governments in Delhi”. Furthermore, Modi’s reforms “are destined to make lasting, rather than transitory, changes in the structure of the Indian economy”.

It sounded a lot like the claims that pro-Modi commentators used to make until demonetisation and farm loan waivers broke their spirit. Take a dash of genuine policy accomplishments, toss in some tweaked (or, worse, simply renamed) pre-Modi initiatives that have carried on, add some hyperbole, underplay the blunders and voila! you have a Strong Reformist Government.

But don’t take my word for it, let’s evaluate the list of claims presented to prove that a “cunning and effective” Modi is transforming India in an unprecedented way.

Broadman starts with FDI, arguing that Modi has contributed not only to a big jump in FDI flows to India (which is plausible) but that India under Modi has equalled China, the great economic story of our time. That’s because India’s FDI in 2015 (as a share of GDP) rose to 2.1%, approaching China’s 2.3%. Furthermore, “between 2005 and 2015 (obviously a period that in part predates Modi)”, he writes, India’s FDI (as a share of GDP) doubled, while China’s halved.

It’s unclear why India deserves the credit for a slowing of FDI flows to China, and the World Bank chart (below) is self-explanatory. FDI to India has picked up, but is still in line with the historical trend. But don’t let that stop anyone overselling this accomplishment.

Broadman then goes on to list eight “notable” reforms, which we analyse below, starting with those that are, in fact, correct:

A revised law on bankruptcy, which will generate freer flows of capital and the flexibility for them to be invested in their highest value in use, thus promoting a more robust, competitive Indian market both for new business start-ups as well as for forcing stale companies who cannot make ‘a go of it’ to close shop and sell their assets.

Few people realise that India’s investment rate is currently at a 14-year low, and a major reason is the inability of some of India’s biggest companies to pay off their debts, which has hurt banks’ ability to lend. The 2016 Insolvency and Bankruptcy Code is aimed at reversing this by speeding up the resolution of bad loans. This will be a complex and drawn-out process, but putting this law in place was necessary, and counts as a win for the Modi government.

The introduction of a nationwide sales tax, which will integrate an otherwise excessively complicated disparate system of different state and federal taxes, a reform that will not only increase tax collections but also help reduce interstate barriers to trade and distortions arising from gaming where within the country purchases should be consummated.

There’s a heated debate underway over how much India’s complex Goods and Services Tax (GST) will benefit the economy, and many will recall that Prime Minister Modi was instrumental in blocking the United Progressive Alliance (UPA)’s original GST proposal as Gujarat chief minister. But hypocrisy aside, the Modi government has shepherded the GST into existence, helping transform India into something close to a single market, and gets the credit for this major tax reform.

Elimination of subsidies for diesel fuel, which will help plug a fiscal hole in government revenues, and even more important create disincentives for using an energy source that adds to, rather than diminishes, pollution and greenhouse gases.

It is true that the Modi government formally decontrolled diesel prices on 18 Oct 2014. But all the heavy lifting had been done by the UPA, which on 17 Jan 2013 permitted retailers to increase the price of diesel by 50 paise/month. As a result, the gap between the actual cost of supplying diesel and its subsidised retail price dropped from ₹9.21/litre to ₹2.80/litre between Jan 2013 and May 2014 (according to Ministry of Petroleum data). It continued under the Modi government until a collapse in global oil prices starting Aug 2014 eliminated the price gap entirely. By the time the Modi government decontrolled diesel prices, oil prices had crashed to the point that decontrol produced a diesel price cut (rather than a hike) of ₹3.37/litre, a freebie no politician could refuse.

If anyone deserves credit here, it is Manmohan Singh.

Removing regulations that forced companies to repetitively renew their business licenses at an artificially high frequency simply to generate revenues to be collected by local bureaucrats.

This one is mystifying. India abolished licensing for most industries on 26 Jul 1991, and the list of industries that require a licence has declined to four: aerospace & defence, industrial explosives, hazardous chemicals and tobacco products. The process of renewing licenses for this handful of industries has indeed been simplified — most notably in defence, where the duration of a licence has extended from three to 15 years, but this hardly qualifies as major reform.

Relaxing rules that reserved specific sectors to be the province of only small and medium sized enterprises even if large firms could produce the goods or deliver the services at lower cost and create economies of scale.

This one is just wrong. The number of items reserved for small-scale enterprises fell from 836 in 1995 to 20 in 2015 under successive governments, and the Modi government’s sole contribution here was to de-reserve the last 20 items. The perils of Googling your way to economic analysis?

Using transparent and competitive auctions for allocating access to the telecom spectrum.

There’s no doubt that the Modi government held telecom spectrum auctions in Mar 2015 and Oct 2016, and is planning one more in 2017. But there’s nothing new here. Even the UPA conducted a “transparent and competitive” auction of 3G and 4G spectrum in May-Jun 2010, before its reputation had been tarnished by what the Supreme Court termed an “arbitrary” and “capricious” 2G spectrum allocation in 2008. Following the Supreme Court’s cancellation of that allocation, the UPA held 2G auctions in Nov 2012, Mar 2013 and Feb 2014. Essentially, the Supreme Court has ensured that no government can allocate resources without holding an auction, and Modi’s being PM is frankly incidental here.

Opening investment in the railway network to majority foreign ownership, thus allowing India to tap into new sources of capital to build out its infrastructure and help the country integrate into a unified economic space to create economies of scale in both manufacturing and agriculture and thus enhance its international competitiveness.

Sounds promising, one problem: foreign investors are still substantially barred from “investment in the railway network”, which remains the preserve of Indian Railways. Where they are permitted is in railway infrastructure, specifically suburban corridors under public-private partnership (PPP), high speed rail, freight corridors, railway electrification, signalling, freight and passenger terminals, rail projects in industrial parks and mass rapid transport systems. This is a solid set of investment avenues, although there was already foreign participation in mass rapid transport and freight corridors before Modi took office. More importantly, any investment in railways depends crucially on the decisions made by a cautious railways bureaucracy. Raising FDI limits may be helpful, but they were never the main barrier to private participation in India’s rail story.

This could count some day as a win for the Modi government, but it’s still very much a work-in-progress.

Permitting foreign investors to participate in construction projects that otherwise were reserved for only domestic service providers, thus generating opportunities for joint ventures and other businesses to incorporate world-class construction techniques and materials.

Another misfire, it would seem. FDI has been freely allowed in construction for more than a decade, and accounted for 7% of total FDI flows between Apr 2000 and Mar 2017. However, stagnation in the sector has slowed FDI flows in recent years, and the Modi government has eased minimum area restrictions, investment lock-in periods and the like (here and here), winning approval from the real estate industry. But the reforms haven’t yet worked: FDI flows to the sector in the last two years were US$218 million, one-twelfth (I kid you not) of the US$2.6 billion that came in during the UPA’s final two years. These reforms may be desirable, but they are far from transformational.

It turns out that only two of the eight reforms proposed as evidence of Modi’s reformist chops add up; five are simply wrong, and one seems too minor to count. To top it all, Broadman concludes with a familiar defence of demonetisation, repeating the widely-known benefits of going cashless without any real examination of the heavy costs of demonetisation, something even Modi supporters now acknowledge (here and, ahem, here).

A look at “Make in India”, published as an oped in the Hindustan Times:

How does one judge Make in India? Recent news that foreign direct investment (FDI) flowing to defence in 2016-17 was an absurd trickle of ₹61,000 (or perhaps $61,000, the Ministry of Defence didn’t specify) seems to have not caused much of a ripple. Nor has the fact that FDI in defence in the past three years has been – this isn’t a typo either – $174,000, notwithstanding several liberalisation announcements.

Defence is just one, albeit telling, sector, with its own peculiarities such as the much-delayed “strategic partners” policy and a single buyer – the Ministry of Defence. But it is an exaggerated version of the story playing out across the high-profile Make in India campaign, which promises to generate millions of jobs in India by increasing the share of manufacturing to 25% of gross domestic product (GDP).

India has seen strong FDI flows in the last couple of years, but most of this is going to ride-sharing services like Uber and Ola and e-commerce providers like Amazon and Flipkart. FDI in manufacturing hit a high of US$9.6 billion in 2014-15 (slightly better than the previous 2011-12 record), but actually fell the next year to US$8.4 billion. A major pickup in 2016-17 seems unlikely.

Despite rising costs in China, India has made little headway into becoming a global manufacturing alternative, particularly at the low end that generates the most jobs. Textiles and clothing jobs from China are moving to Myanmar, Cambodia and, yes, Bangladesh, while Vietnam, Thailand and Indonesia are gaining in electronics production. India has become a global small-car hub over the last couple of decades, but this relatively high-end segment is not a massive job-creator.

Things are slowly changing. India has a large domestic market to leverage, and the two dedicated freight rail corridors it is now building (connecting Delhi with Mumbai and Kolkata) should contribute to a major reduction in logistics costs in a few years. But, for now, southeast Asia is eating India’s lunch.

There are limits to what a government can do. India’s can’t, and arguably shouldn’t, try to emulate China’s labour suppression that kept manufacturing costs down, which Myanmar, for instance, could. This government isn’t even pushing the smaller measures forcefully enough. The focus on “ease of doing business” reforms is commendable, but only four of 31 states have implemented meaningful labour reform in the last three years. Even if the opposition doesn’t want to cooperate, the BJP could certainly prod its 12 other states to follow suit.

And let’s not forget the self-goals. Demonetisation might have contributed to the BJP’s political victory in Uttar Pradesh, but it has shredded the informal sector. Large companies in sectors from automobiles to consumer goods have laid off thousands of workers, as have their suppliers. Demonetisation may have delayed the goals of Make in India by months, if not years.

It’s not a bad thing for India’s aspirations to exceed its political grasp, but a trending social media hashtag won’t generate jobs. India has always done its bit of manufacturing, and the true test of Make in India lies in whether its GDP share meaningfully rises, not in photo-ops.

The logic behind the government’s Make in India initiative is clear. As Prime Minister Narendra Modi stated in his speech at the launch of “Make in India Week” in Mumbai on 13 Feb 2016:

We launched the Make in India campaign to create employment and self-employment opportunities for our youth. We are working aggressively towards making India a Global Manufacturing Hub. We want the share of manufacturing in our GDP to go up to 25 per cent in the near future.

The specific goal is to increase the share of manufacturing in India’s Gross Domestic Product to 25% by 2022, which is expected to generate approximately 100 million jobs for Indian workers (see Ab ki baar, cut-and-paste sarkar for Make in India’s similarities with the UPA’s 2011 National Manufacturing Policy).

So how are we doing so far? If you believe the headlines, pretty well. Responding to the lifting of foreign direct investment (FDI) caps in several sectors, efforts to improve the Ease of Doing Business and of course Prime Minister Modi’s frenetic wooing of investment in foreign travels, gross FDI flows to India jumped 27% to $45 billion in 2015-16, an all-time high. Even the Finance Ministry’s usually measured 2015-16 Economic Survey touted the FDI increase as a success for Make in India. With our social media feeds full of stories about this or that investment, clearly the #MakeInIndia lion is roaring.

But the closer you get to the lion, the more the roar sounds like a meow.

Consider the most recent FDI data from the Reserve Bank of India (RBI), broken up by sector, since Make in India specifically concerns manufacturing. After an encouraging jump to a record $9.6 billion in 2014-15, FDI in manufacturing actually fell to $8.4 billion in 2015-16 (below the $9.3 billion it had reached in 2011-12).

Note that these numbers cover inflows approved by the RBI and other agencies, and exclude share purchases, reinvested earnings and so on. This pattern is consistent with data from the Department of Industrial Policy and Promotion, analysed here.

Furthermore, the percentage of FDI flowing to manufacturing, which has been in the range of 35-40% for the past four years, dropped to 23% in 2015-16. Rather than manufacturing, services — think e-commerce providers like Amazon, Snapdeal and Flipkart, ride-sharing services like Uber and Ola — seem to be drawing a greater share of investment.

What about the broader economy? After all, Make in India’s main objective is to raise the share of manufacturing in the economy as a means of generating jobs.

Sadly, no meaningful change yet: the share of manufacturing has been flat for the past decade, with a slight downward trend (data here and here).

Here’s the rub: there is no doubt that building infrastructure, liberalising land and labour laws and improving the ease of doing business is difficult and time-consuming, and will take time to play out. But the Modi government needs to convince voters that change is happening, and fast.

Which is the genius of the Make in India campaign: it is essentially a branding exercise under which the government claims credit for pretty much everything and yet nothing. Every factory inaugurated, every defence deal signed, every shovel stuck into the ground will now be accompanied by the hashtag #MakeInIndia, even if the percentage of GDP arising from manufacturing stays exactly where it’s been for the past decade.

The Tejas is an Indian fighter plane that has been in development for more than two decades and first flew in 2001, but let’s label it #MakeInIndia. The BrahMos is a modified Russian cruise missile with Indian software that entered service with the Indian Navy in 2005, but, hey, why not #MakeInIndia.